Nearly three years after the Food and Drug Administration mandated that it improve quality control at one of its top drug-manufacturing plants, Hospira (ticker: HSP) is getting ready for an inspection of the Rocky Mount, N.C., facility, possibly in the first half of this year. A clean bill of health from the FDA could clear a path to boost the plant's production, which has been scaled back amid the remediation efforts. It also would enable Hospira to focus more resources on promising markets, including generic substitutes for biotech treatments whose patents are expiring. These new products could help unlock the substantial value in the shares, which some investors and analysts believe are worth at least 30% more than last week's $34.50.

CEO Michael Ball is cleaning up the problems in Hospira's manufacturing plants and expanding its global reach in injectable drugs and systems.
James Schnepf/Hospira

Overseeing the plant's cleanup and the company's revamped strategy is Chief Executive Michael Ball, a veteran of the health-care industry brought onboard in March 2011 from
Allergan
(AGN), where he had worked for 16 years, the last five as president, and was responsible for building a substantial international business. Ball plans to expand the global reach of Hospira, which makes generic injectable drugs including morphine and antibiotics. He wants to increase its presence in France, Germany, and Japan as well as the emerging markets of China and Brazil. In cleaning up Hospira's plants, he has already made sweeping changes at the company, replacing all five plant managers in the U.S. and about 65% of the senior staff at those operations. There's a brand new head of global regulatory affairs and a new chief medical officer.

CEO Ball declined to be interviewed by Barron's.

After spending what's estimated to be more than $375 million on remediation since the third quarter of 2011—the bulk of it at Rocky Mount for consultants, a state-of-the-art quality-control laboratory, new automated visual-inspection equipment, and new managers—Hospira hopes to meet the FDA's standards. (On Feb. 6, Barrons.com reported on the company's progress in a Stock Alert column, "Give Hospira a Shot").

Hospira also hopes to work out a timeline for operating the North Carolina plant full-tilt, from about 60% currently. That would give a powerful lift to the Lake Forest, Ill.-based company's revenue and profit. Gross profit margins, now about 30%, will probably rise as the costs of upgrading its facilities decline, plant efficiencies improve, drug shipments increase, and prices rise. The Rocky Mount facility hasn't been the only focus of regulatory attention for Hospira, but it has the highest profile because it accounts for 25% of the company's $4 billion in sales.

Running the plant at capacity would also help alleviate a critical shortage of drugs considered vital to treating everything from cardiac arrest and seizures to pain management. Indeed, five other major manufacturers of sterile injectable drugs have also had to scale back production in the past three years after the FDA determined their processes also violated quality-control standards and procedures, leading in some cases to contaminated solutions.

The uncertainty surrounding Hospira's inspection weighs on the stock. At their current quote, the shares are down about 43% from their November 2010 high. Despite what has been a giddy time for many stocks, Hospira shares aren't far above their 52-week low of $28.62.

That has created an opportunity to invest in a company with the world's No. 1 market share—37%—in the generic injectable-drug market, a highly specialized class of drugs that require advanced handling techniques. The complexity of making these drugs creates a high barrier to entry. Hospira enjoys limited competition and higher margins as a result.

Despite its travails, the company has suffered only slight market-share losses. In all, about 63% revenue comes from these drugs. Hospira also ranks No. 2 in the market for intravenous-delivery systems and pumps used to supply and manage medications, boasting a 17% share. The systems and pumps kick in about 24% of revenue; other products like IV solutions comprise the rest.

Matt Sauer, a portfolio manager at Lateef Investment Management, which oversees $4.5 billion in assets, is confident that the company is on the right track. Hospira ranks among the firm's top 10 holdings. (For more on Lateef's strategy, see "Rumblings of the 'Great Rotation'.")

By 2014, Sauer expects Hospira to be operating at historic production levels. He sees the potential for the company to earn $3 to $3.25 a share. That's up from an estimated $2 a share the company expects for 2012 and the $2.31 Wall Street projects in 2013.

Sauer sees the shares hitting the high $40s or low $50s as revenue and profit increase and the earnings multiple expands, an appreciation of 30% or more. Hospira shares now trade at 15 times 2013 earnings estimates.

AS BULLISH AS THESE projections are, they don't include the growth potential from a new drug group known as biosimilars, or generic versions of expensive biotech drugs. Hospira is the leading U.S.-based producer of these drugs and among the world's top three, along with Israel's
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NovartisNVS -2.6650873556411017%Novartis AG ADSU.S.: NYSEUSD98.61
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(NVS). The existing biotech drugs, also known as biologics, are costly in part because they have highly complex molecular structures and are made with live organisms.

The Bottom Line

Hospira's stock could rise 30% or more once the company can spend more time and money on its products and less on regula-tory issues. A new generic offering could add even more.

An estimated $40 billion of the biologics are scheduled to lose their patent protection through 2020, providing lots of new opportunity for Hospira and its rivals. Datamonitor, a London-based business-research group, has forecast that the biosimilar market will reach nearly $4 billion by 2015 from $243 million in 2010.

Hospira's biosimilar for Amgen's Epogen, an erythropoietin (EPO) treatment for anemia in patients with renal failure, is in Phase III clinical trials with the U.S. FDA. The last patent on Epogen is scheduled to expire in 2015, which is when the U.S. market for a biosimilar version is set to begin. Hospira has been selling another EPO biosimilar, Retacrit, in Europe since 2008. It's also selling Nivestim, a version of Amgen's Neupogen, which boosts infection-fighting white-blood cells in cancer patients, in Europe and Australia.

HOWEVER THE VALUE IN Hospira's shares is realized, Ball is confident the company is rejuvenated. During a Jan. 8 presentation for investors at a JPMorgan conference, he said, "We're in great, growing markets. We've got great market-share position. We've got a great pipeline. We've got great new people. And that to me…indicates a great future."